Ad Age ran an interesting commentary yesterday from media investment bankers Reed Phillips and Ken Sonenclar of DeSilva & Phillips analyzing the implications of the prospective sale of Hulu for the valuation of content.
At a $2 billion price tag, the Hulu valuation is a home run for the founders.
This year, Hulu is expected to reach $500 million in revenue and earn $45 million. A $2 billion price tag would represent 44 times earnings, a high valuation considering that other media businesses are valued at eight to 16 times their earnings. That may sound off the charts until you compare it with Hulu’s prime competitor, Netflix, which has recently been trading at more than 80 times earnings. One of the reasons Hulu is such a precious commodity right now is because of what Netflix has accomplished: It has a market cap of $15 billion and 23 million paid subscribers.
As Phillips and Sonenclar point out, the big winners in the deal are the founders who came to the table with programming, not the private equity firm who showed up with the $100 million required to build out the platform.
Are they right? And is this a permanent condition?
Leverage in the media industry is a pendulum that swings between the companies that control distribution and the companies that control content. The formula has always been one of supply and demand. When a few companies control distribution — effectively control access to consumers — then they can demand favorable terms from content providers to provide access; when distribution is broadly distributed, then the pendulum swings to the content providers, who are able to exact favorable terms from distribution channels that want to leverage the audience-creating power of quality content.
The digital age created two points of disconnect for traditional media companies: audience could be aggregated without a traditional content strategy and distribution appeared to be virtually endless, diluting the value of traditional content.
Philips and Sonenclar’s commentary on the Hulu valuation suggest that the dynamics that created the second point of disconnect are being mitigated by the maturing digital economy.
I think that there are two factors that are contributing to this shift, which effectively swings the pendulum back to companies that create quality content that can be distributed across multiple channels.
The first is an ever-improving e-commerce ecosystem that has generated a multi-billion dollar economy of micro payments that only five years ago media execs were saying would never happen.
The second is the shift by major marketers of meaningful portions of their marketing budgets to digital strategies. These leading brands are applying sophisticated marketing knowledge to leverage the digital audience. They want to surround themselves with quality, they want to achieve reach without significant problems, they want to be able to track and measure, and they understand that branding and generating consumer demand require consistency across multiple channels.
The maturation of these two trends creates a virtuous cycle that benefits content creators: consumers are demanding immediate and easy access to programming that they want to see and marketers want efficient and innovative ways to reach those consumers.
An asset like Hulu can justify its remarkable valuation just on the strength of the distribution agreements it has with the content companies.
Does that get you the kind of growth that you need to justify a 44 times multiple? Any valuation that assumes that much growth is speculative. However, whatever you measure the digital video content market at today, it is a fraction of the size it will be in five years. If you have the capital, betting on Hulu to be a major player in 5 years time isn’t a bad bet.
While this valuation is being played out on the mass media stage, there are lessons for more targeted media companies.
The first is that there is an art and a cost to making high quality content. Brands that have the process of creating high quality content built into their business model have a long-term advantage. They do, however, have to be assiduous in making sure that their content is meeting the current needs of the audience.
The second is that high quality content is only relevant to the marketplace if it is being distributed across channels and in formats that are easy for the consumers to use.
The third is that marketers will follow high quality content across those channels, assuming that they are able to see commercial value and that they have made the institutional commitment to integrate the Internet into their marketing strategy.
In practical terms, executives leading media companies, large or small, have to be able to answer these two questions:
- Where is my audience and how do they want to get content that they value?
- How are my marketing customers spending their money on the Internet?
The strategies in creating value lie in the answer to those two questions. Hulu is one point of validation.